(The author is a Reuters Breakingviews columnist. The opinions
expressed are his own.)
By Robert Cyran
NEW YORK, Dec 19 (Reuters Breakingviews) - Markel (MKL.N)
models itself after Warren Buffett's Berkshire Hathaway
(BRKa.N). The $4 billion insurer aims for smart underwriting,
picking stocks and adding long-term value. It has even got into
reinsurance and owning whole businesses. But performance, while
good, isn’t as impressive as it could be compared to Berkshire,
given its far smaller size.
Buffett’s recipe isn’t complex. Write insurance policies
when prices are good, capture the float and invest capital
wisely when the market miscalculates. Markel has copied this
strategy. It has largely stuck to underwriting niche markets, in
everything from dude ranches to livestock, where limited
competition ensures high premiums. And its equity holdings are
concentrated in long-term bets on the likes of Diageo (DGE.L)
and Berkshire Hathaway itself, and have outperformed the S&P 500
over the past five, 10 and 20 years.
Now the firm is expanding in reinsurance by purchasing
Alterra Capital ALTE.O for about $3 billion in stock and cash.
Buffett increased his holdings in the sector during and
following the financial crisis by investing billions in Swiss Re
SRENH.VX and Munich Re (MUVGn.DE). While fire-sale valuations
may have come and gone, companies in this corner of the
financial industry still look relatively cheap. Even with a 34
percent takeover premium, Markel is only paying slightly above
book value. If Markel can invest Alterra’s conservative book
with its customary skill, good returns should follow.
Yet investors aren’t enamored with the deal, sending
Markel’s market value down close to 10 percent. While
diversification helps insurers, investors worry Markel is
expanding in an inferior business – and perhaps becoming too
much like a bloated Berkshire, where Buffett admits the firm’s
increasing size has made it harder and harder to outperform
Moreover, Markel’s stock has largely tracked its larger
rival, and the S&P 500, over the past five years. Sure, by both
companies' preferred metric – growth in book value per share –
Markel has outperformed. But growth has drifted downwards to a
respectable 9 percent per annum over the past five years. That’s
only about 1.5 percentage points higher than Berkshire. All
things being equal, Markel should be doing far better than
Berkshire given its far smaller size – Buffett's behemoth is 50
times larger by market value. This mini-Berkshire shows it’s
hard to beat the master.
SIGN UP FOR BREAKINGVIEWS EMAIL ALERTS:
- U.S. insurer Markel on Dec. 19 said it had agreed to buy
Alterra Capital for about $3 billion, or $31 per share, in cash
and stock. Markel is paying a 34 percent premium to the closing
price of the reinsurer’s stock on Dec. 18.
- In exchange for each Alterra common share, investors will
receive 0.04315 share of Markel and a cash payment of $10.
Following closure of the deal, Markel’s existing investors will
own approximately 69 percent of the combined company and
Alterra’s investors will own 31 percent.
- Company statement: link.reuters.com/meq74t
- Reuters: Markel expands into reinsurance with $3 bln
Alterra buy [ ID:n L4N09T647]
Giving 100 percent [ID:nL1E8HCB8H]
City slickers [ID:nL1E8G2F0Y]
- For previous columns by the author, Reuters customers can
click on [CYRAN/]
(Editing by Antony Currie and Martin Langfield)
Keywords: BREAKINGVIEWS BUFFETT/MARKEL
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